Korea's Gasoline Price Rise Edges Up 0.1 Percentage Point as U.S. Jumps 8.1... Oil Price Cap's 'Buffering Effect'

KIET: “Slows the Domestic Pass-Through of Price Shocks, Giving Households and Businesses Time to Respond”
Prolonged Controls Could Strain Supply and Public Finances; Targeted Support and Gradual Return to Normal Pricing Needed

Yonhap News Agency

An analysis has found that the government’s oil price cap has had some effect in slowing the pass-through of surging international energy prices to domestic prices. While gasoline prices in Korea were virtually unchanged in August and September, increases widened sharply in the United States and Germany. However, analysts say that prolonged price controls could weaken refiners’ incentives to supply fuel and increase the government’s fiscal burden, making it necessary to combine targeted support with a gradual return to normal pricing.

According to a report titled “The Effects of the Oil Price Cap and Policy Responses,” released on Tuesday by the Korea Institute for Industrial Economics & Trade (KIET), energy prices in Korea, China and Thailand, which implemented direct price management policies from March to August this year, rose by an average of 15.0% year over year. The average increase in the United States and Germany, which responded with measures such as expanding supply or cutting taxes, was 24.9%, a gap of 9.9 percentage points between the two groups.

In Korea, in particular, there has been almost no further acceleration in price increases recently. The year-over-year rise in Korea’s retail gasoline prices edged up just 0.1 percentage point, from 11.8% in August to 11.9% in September. Over the same period, the increase widened by 8.1 percentage points in the United States, from 29.5% to 37.6%, and by 9.4 percentage points in Germany, from 27.7% to 37.1%. In Thailand, it widened by 6.6 percentage points, from 14.1% to 20.7%.

The Korea Institute for Industrial Economics & Trade interpreted this as a result of the price cap slowing the transmission of international energy price shocks to domestic prices. Rising international energy prices are passed on to prices for goods and services through fuel and logistics costs, ultimately affecting household purchasing power and corporate profitability. The report said that slowing the pass-through of costs through a price ceiling gives households time to adjust their spending and businesses time to change their financing or contract terms.

It can also curb inflation expectations and unnecessary advance purchases and inventory accumulation, while giving the government and businesses more time to secure alternative supply sources or transportation routes. However, the Korea Institute for Industrial Economics & Trade noted that these effects can be sustained only if suppliers’ incentives to produce and import, as well as their access to financing, are maintained.

In response to the surge in international oil prices, Korea chose to cap refiners’ supply prices rather than the prices consumers pay at gas stations. Other major economies took different approaches. China limited the size of price increases under its existing administered pricing system, while Thailand combined fund support with price intervention. Japan lowered consumer prices by providing subsidies to refiners and importers.

The United States, by contrast, focused on expanding supply, including through the release of strategic petroleum reserves, while Germany used a temporary fuel tax cut and price adjustment rules. Singapore opted to reduce the real burden on households and businesses through measures such as cash payments and vouchers.

In Japan, the consumer price index (CPI) for gasoline rose by an average of -4.5% from March to August, indicating that subsidies also helped curb increases in consumer prices. However, as the size and duration of subsidy payments increase, so does the government’s fiscal burden.

The Korea Institute for Industrial Economics & Trade cautioned against interpreting differences in price increases across countries as the pure policy effect of the price cap. This is because exchange rates, taxes, price indicators used by each country, and the time lag before international prices are reflected in domestic prices all vary. The report said it is more reasonable to view the price cap in Korea as having limited further price increases rather than having eliminated them.

The problem arises if the price cap remains in place for a long time. The cost of procuring crude oil and petroleum products on international markets does not fall, so the costs consumers do not bear must ultimately be shouldered by refiners or the government. If the price ceiling is held in place for an extended period, refiners’ incentives to produce and import may weaken, and the fiscal burden may accumulate. There is also a risk that prices suppressed during the controls could rise all at once when they end. Another limitation is that industries with a high share of naphtha, gas and electricity in their energy use receive limited direct benefits from the oil price cap.

The Korea Institute for Industrial Economics & Trade proposed adjusting the price ceiling to reflect international product prices, exchange rates and inventory levels, and preparing an “exit strategy” to gradually return prices to normal when international price shocks ease.

It also said that when compensating refiners for losses, the government should verify actual procurement costs, freight and insurance expenses, and transparently manage both payments and outstanding amounts to be settled. If support is needed, it proposed focusing it on vulnerable groups, including low-income households, essential transportation and agriculture and fisheries. For manufacturing, it recommended supporting raw material procurement and liquidity, while prioritizing sectors with the largest actual declines in production and exports. It also stressed the need to combine these measures with supply-side steps, such as using strategic and commercial inventories, diversifying import sources, and easing transportation and insurance constraints.

Kim Soo-dong, a senior research fellow at the Korea Institute for Industrial Economics & Trade, said, “Policy outcomes should not be judged solely by changes in prices. The net burden on households, actual production and exports in industries, supply stability, and the fiscal burden should all be assessed comprehensively.”

This content was produced with the assistance of AI translation services.